Prudential regulation and bank performance: Evidence from China

Abstract

This study examines the effects of prudential regulatory policies on bank performance by analyzing specific prudential regulation policy data for the Chinese banking industry. We construct a series of indicators to measure the effectiveness of prudential regulatory policies. Our empirical findings indicate that the regulatory policies improve banks' profitability and reduce non-performing loan ratios, but they lead to a decrease in banks' liquidity. Furthermore, we demonstrate that the improvement in banks' profitability attributes to the rise in non-interest income. Additionally, our study investigates the existence of banks' regulatory arbitrage and finds that prudential regulatory policies significantly increase the off-balance sheet businesses.